A Few Red Flags in the Stock Market to Watch

A Few Red Flags in the Stock Market to Watch

May 08, 2023

As an investor, it's important to keep a close eye on the stock market indicators. Currently, the indicators are showing a concerning trend that investors should pay attention to.

The stock market has seen a rally in big tech stocks after their earnings this week, driving up major indexes. However, the number of stocks outperforming the broader market has slipped to levels that have not been seen in decades, and in some cases, ever. This weakness is being considered by some experts as a warning sign of potential economic weakness in the near future.

A Few Technical Warning Signs

One of the indicators of the stock market is the number of stocks that are outperforming the market. This number has been steadily declining over the past several months, and it reached a new low recently. This is concerning because it indicates that investors are not finding many opportunities to make money in the market. This lack of opportunities can be a sign of weakness in the economy as a whole.

Another indicator that is flashing a warning sign is the number of stocks that are trading above their 200-day moving average. This number has also been declining, and it is currently at a level that has not been seen in years. This is a bearish sign for the market, as it indicates that the trend is moving downward and may continue to do so.

The Fear Index

Finally, the VIX, also referred to as the "Fear Index," is a real-time market indicator that reflects investor expectations of market volatility over the next 30 days. It is calculated based on the prices of options on the S&P 500 index, which measures the volatility of the overall stock market. Generally, a high VIX indicates increased market uncertainty, while a low VIX suggests calmer market conditions.

Intuitively, most would conclude that when the VIX is low, it indicates that investors are relatively complacent and have a positive outlook on the market because it implies a sense of stability and confidence, as market participants believe that risks are low and anticipate smooth market conditions.

Yet while a low VIX can indicate a period of stability, it is essential to exercise caution. Unusually prolonged low volatility periods can sometimes precede market downturns or increased volatility. This is known as "complacency risk." Investors should remain vigilant and monitor other fundamental and technical factors alongside the VIX to make well-rounded investment decisions.

The Other Big Economic Warning Sign

In addition to these indicators, there is another big warning sign that every investor should be aware of – and likely where most of us have the majority of our net worth – housing.

The state of housing in many regions around the country is reaching a troubling point, signaling potential economic turmoil. As access to affordable housing becomes increasingly challenging, the consequences ripple throughout society and have a detrimental impact on the overall economy.

Recent data from the National Association of Realtors confirm a not-so-good trend as just last month:

  • Total existing-home sales – completed transactions that include single-family homes, townhomes, condominiums and co-ops – fell 2.4% from February.
  • Year-over-year, total existing home sales waned 22.0% from a year ago.
  • The median existing-home pricefor all housing types in March declined, continuing a trend of the past 6 months.
  • Existing-home sales in the Northeast were down 21.2% from March 2022.
  • In the Midwest, existing-home sales retracted 17.6% from the previous year.
  • Existing-home sales in the South receded 20.4% from the prior year.
  • In the West, existing-home sales declined 30.5% from the prior year.

The residential housing trouble is not confined to the housing sector alone but has a ripple effect on the broader economy. The construction industry suffers as the demand for new housing outweighs the supply, resulting in stalled projects and job losses. Additionally, reduced consumer spending due to high housing costs dampens economic growth. Furthermore, the instability in the housing market can trigger financial instability, leading to a chain reaction that affects banking and lending institutions.

Investors Should Pay Attention

Overall, many of the current stock market indicators are the weakest they have been in quite some time, and there are many warning signs that investors should pay attention to.

While big tech stocks may be rallying, the broader market is showing weakness, which may be a sign of potential economic weakness in the near future.

As an investor, it's important to stay vigilant and keep a close eye on these indicators to make informed investment decisions.

 



Important Disclosures

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.

Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market. All indexes are unmanaged and cannot be invested into directly.

S&P 500 Index: The Standard & Poor's (S&P) 500 Index tracks the performance of 500 widely held, large-capitalization US stocks.

VIX: This is a trademarked ticker symbol for the Chicago Board Options Exchange Market Volatility Index, a popular measure of the implied volatility of S&P 500 Index options. Often referred to as the fear index or the fear gauge, it represents one measure of the market’s expectation of stock market volatility over the next 30-day period.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by FMeX.

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